Smart Contracts

Smart contracts are applications that can be placed on a blockchain. In essence, a smart contract is a deterministic computer program that is replicated on a blockchain and executed. Deterministic means simply stated: if A then B. Smart contracts therefore make it possible for parties to record the terms of their agreements in unalterable program code which, as soon as the conditions are satisfied ('if A'), will automatically be executed ('then B').

Two examples
•    If the soft drink vending machine registers that the cola is almost finished ('if A'), then in accordance with the smart contract concluded between the operator and supplier, a purchase and supply contract is executed ('then B'). If the soft drink vending machine registers that the cola is almost finished ('if A'), then in accordance with the smart contract, payment automatically takes place ('then B').

•    If, based on the information from various linked data files (such as the Persons Database, the land register or the register of a trusted institution) and the findings of the government functionary (see 'Oracles and Smart Contracts'), the smart contract ascertains that all subsidy conditions have been met ('if A'), then in accordance with the smart contract the subsidy is granted ('then B').

This does not involve much ingenuity. Basically, a smart contract does what it has been instructed to do. There is no thought or proactivity involved. The necessary ingenuity must indeed come from the lawyer and others who are involved in formulating the agreements (the agreements must be legally tenable and must set out the purpose of the parties), the programmer of the code (this code may not contain any coding errors and may not be alterable) and everyone jointly in translating the agreements in the code. Because this concerns blockchains, due consideration must be given to various aspects of the alignment between the legal aspect and this specific technology (more about this can be found in our White Paper on the legal aspects of blockchain). We know from experience that working in the blockchain is legally perfectly feasible provided that law and technology work together from the start and are well-attuned to one another.

Smart contracts

A smart contract is not actually smart in itself. This is also not necessarily a contract (an agreement) in a legal sense. Various 'guises' are conceivable. Besides agreements, this could for example include making donations, earmarking subsidy funds, issuing a licence or monitoring. Accordingly, this not only involves other private law juridical acts but also administrative juridical acts and forms of administrative law actions in which decision-making, supervision and enforcement merge together as it were. How a smart contract is legally interpreted ultimately depends entirely on the specific application (read more about this in the report on smart contracts as a specific application of the blockchain technology,Smart contracts als specifieke toepassing van de blockchaintechnologie).

Legal questions about smart contracts

It is quite clear that the smart contract is not going to unleash a revolution that will make lawyers superfluous. But which legal questions are involved in the application of smart contracts? On a meta-level, the first question concerns the extent to which the law can be captured in code.

In a more general sense, additional questions concern for example the rights, responsibilities and liability of the programmer, the platform that the smart contract functionality offers and what the decisive factor is if it goes wrong. Questions could also arise with regard to the applicable law and how the right to protection of personal data can be safeguarded in the application. There are also specific legal questions with regard to the conduct of administrative bodies, including their conduct in the context of decision-making. For example, what the significance is of the general principles of proper administration for working with smart contracts and computerised decision-making processes.

Oracles and smart contracts

In order to be able to determine whether the conditions for the execution of a smart contract have been satisfied, input from outside the blockchain will usually be necessary. For example, confirmation that the parcel has been delivered, that the subsidy applicant lives in the municipality concerned or that certain weather conditions that have been insured against have in fact occurred.  A blockchain itself is however 'deaf and blind': the blockchain cannot autonomously obtain information from outside. This is where so-called oracles come into the picture. With an oracle, (factual) information, assessments and decisions that are important for the execution of a smart contract but are not themselves part of it, can be entered into the blockchain. Concealed behind an oracle may for example be an external information source such as a database or the register of a trusted institution. But it could also be a party or a person such as an authorised decision-maker, notary or government functionary. The parties making use of the smart contract accept upfront the information or the assessment of the oracle and what that will mean for the execution of the smart contract.

Contact

Smart contracts is a complex subject. Do you have any questions or would you like sometime to exchange ideas with us on this subject without obligation? Please contact Sandra van Heukelom. You can also download the report on smart contracts as a specific application of the blockchain technology which identifies the issues regarding the legal and regulatory framework and the training requirements related to smart contracts.